Tuesday, January 22, 2013

The Value and Values of Finance

When I was an undergraduate at Georgia Tech from 2006 to 2010, I was one of a group of ten Stamps Scholars. The scholarship program was founded by E. Roe Stamps, founding partner of the private equity firm Summit Partners. Since then, the program has expanded to 32 schools and hundreds of scholars. (This is not an economics scholarship-- students have a wide variety of majors.) Now that the program is so large, they hold a Stamps Scholars National Convention every other year. This year's conference will be hosted by the University of Michigan in early April, and the theme is "Solving Big Problems."

Today I received an email sent to all of the Stamps alumni asking for suggested topics for convention sessions. What "Big Problems" should several hundred bright undergraduates think about and work on during the next few years? We were asked to provide a topic, a link to a relevant article, and brief written comments for the students.

Shortly before receiving this email, I was reading and thinking about Noah Smith's post, "How much value does the finance industry create?" and related posts about the social cost of finance on the Uneasy Money blog. I still don't know exactly where I stand on this topic, but I think it's big and interesting enough to ask this large group of undergrads to think about. They have all benefited from the fortune that Mr. Stamps made in finance, and many are probably considering careers in finance. Here is what I wrote to them. Hopefully it will prompt a good discussion in April and stick in the back of a few young people's minds. If you have other "Big Problems" that you think undergraduates should be thinking about, please leave comments!

As Stamps Scholars, we have all benefited tremendously from finance. Mr. and Mrs. Stamps epitomize the good that can come from finance. They have invested not only in businesses, but also in our education and the future of the community. In the aftermath of the financial crisis, there is increasing sentiment that not all finance is so good.

In the article by John Cassidy, he writes:

"Since 1980, according to the Bureau of Labor Statistics, the number of people employed in finance, broadly defined, has shot up from roughly five million to more than seven and a half million. During the same period, the profitability of the financial sector has increased greatly relative to other industries. Think of all the profits produced by businesses operating in the U.S. as a cake. Twenty-five years ago, the slice taken by financial firms was about a seventh of the whole. Last year, it was more than a quarter. (In 2006, at the peak of the boom, it was about a third.) In other words, during a period in which American companies have created iPhones, Home Depot, and Lipitor, the best place to work has been in an industry that doesn’t design, build, or sell a single tangible thing...Not surprisingly, Wall Street has become the preferred destination for the bright young people who used to want to start up their own companies, work for NASA, or join the Peace Corps. At Harvard this spring, about a third of the seniors with secure jobs were heading to work in finance. Ben Friedman, a professor of economics at Harvard, recently wrote an article lamenting 'the direction of such a large fraction of our most-skilled, best-educated, and most highly motivated young citizens to the financial sector.'"

You, Stamps Scholars, are without a doubt some of our "most-skilled, best-educated, and most highly motivated young citizens." Whether or not you are considering a career in finance, you will be interacting with the financial sector in one way or another. So how do you decide when finance adds value to society, and when it does not? How do you decide when finance operated with values you can agree with, and when it does not? These are complicated, weighty questions that challenge economists and policymakers alike, and I encourage you to challenge yourselves with them as well.